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Comparing Section 179D and 45L: Which Tax Incentive is Right for Your Project?

Comparing Section 179D and 45L: Which Tax Incentive is Right for Your Project?

Explore how Section 179D and Section 45L provide tax deductions and credits respectively, encouraging energy-efficient upgrades in commercial and residential buildings, with recent enhancements and strategic insights for choosing the right incentive.

By Abby Massey ・ 5 min read

Tax incentives play a crucial role in promoting energy-efficient building practices. Among the most significant are Section 179D and Section 45L, each offering substantial financial benefits. But which one is right for your project? This blog will compare these two incentives to help you make an informed decision.

An Expert Guide To: The Section 179D Tax Deduction

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Understanding Section 179D and 45L:

Section 179D: Section 179D, also known as the Energy Efficient Commercial Buildings Deduction, is designed to encourage energy-efficient improvements in commercial buildings. It provides tax deductions of up to $5.00 per square foot for energy-efficient upgrades. These upgrades can include HVAC systems, interior lighting, and building envelope enhancements. To qualify, improvements must achieve at least 25% energy savings compared to an ASHRAE 90.1 baseline.

Section 45L: Section 45L focuses on residential buildings and offers tax credits for constructing or renovating energy-efficient homes. The credit provides up to $5,000 per unit for homes that meet specific energy-saving standards, such as those certified under the Department of Energy's Zero Energy Ready Home program. This credit is aimed at incentivizing developers to adopt energy-efficient practices in residential construction.

Eligibility and Application:

Section 179D:
  • Eligible Buildings: Commercial buildings, high-rise residential buildings, government and tax-exempt buildings.
  • Eligible Improvements: HVAC systems, interior lighting, building envelope enhancements.
  • Who Can Benefit: Building owners, lessees, and designers (for government or tax-exempt buildings). Learn more about how designers can benefit here
Section 45L:
  • Eligible Projects: Single-family homes, multifamily units, and high-rise residential buildings.
  • Certification Requirements: ENERGY STAR or Zero Energy Ready Home certification.
  • Who Can Benefit: Residential developers and builders.

Benefits and Savings Potential:

Section 179D:
  • Significant Tax Deductions: Up to $5.00 per square foot.
  • Examples: A 100,000 square foot building with energy-efficient improvements can qualify for up to $500,000 in deductions.
  • Market Value Enhancement: Energy-efficient upgrades can increase the building’s market value.
Section 45L:
  • Per-Unit Tax Credits: Up to $5,000 per unit.
  • Examples: A 100-unit multifamily project could receive up to $500,000 in tax credits.
  • Offset Higher Costs: These credits can help offset the costs of advanced energy-efficient technologies.

Recent Enhancements:

Both programs have seen significant updates, particularly with the updated passing of the Inflation Reduction Act.

Section 179D:
  • Increased Deduction: From $1.80 to $5.00 per square foot.
  • Prevailing Wage and Apprenticeship Requirements: Additional bonuses for projects meeting these criteria.
Section 45L:
  • Increased Credit Amounts: Up to $5,000 per unit.
  • Expanded Eligibility: Now includes mid and high-rise residential buildings.
  • Updated Standards: Aligns with DOE’s Energy Star and Zero Energy Ready Homes programs.

Choosing the Right Incentive:

When deciding between Section 179D and Section 45L, consider the type of project and the potential financial benefits.

  • Section 179D: Ideal for commercial buildings or high-rise residential projects focused on comprehensive energy-efficient improvements. Offers substantial deductions that can significantly reduce tax liabilities.
  • Section 45L: Best suited for residential developers aiming to construct or renovate energy-efficient homes. Provides direct financial incentives that can make sustainable residential projects more viable and attractive to environmentally-conscious buyers.

Conclusion:

Both Section 179D and Section 45L offer valuable incentives for energy-efficient building practices, but the right choice depends on your specific project needs. By understanding the benefits and eligibility requirements of each program, you can maximize your tax savings and contribute to a more sustainable future. For personalized advice and assistance in navigating these incentives, consult with TaxTaker today and start optimizing your energy-efficient projects.

Register for the webinar here

An Expert Guide To: The Section 179D Tax Deduction

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About the author

Abby Massey
VP of Energy Incentives

Abby Massey is an expert in applying tax incentives for clean energy initiatives. With a B.S. in Civil Engineering from Purdue University and licenses in 47 states plus the District of Columbia, Abby offers significant expertise to her role at TaxTaker as the Vice President of Energy Incentives. Her experience includes certifying over 1,400 179D deductions, achieving more than $100 million in savings for clients. As a LEED Accredited Professional, Abby is dedicated to sustainable building practices. In her role at TaxTaker, she focuses on optimizing energy incentives for clients by leveraging her in-depth understanding of the 179D program, aiming to improve business sustainability and efficiency.

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